JPMorgan Chase expands housing rescue plan
The bank will put a moratorium on foreclosures until its new program can be implemented in about 90 days.
NEW YORK (CNNMoney.com) -- JP Morgan Chase unveiled a bold new foreclosure prevention program Friday.
The bank will step up its efforts to offer mortgage modifications for borrowers at risk, institute an independent review process to eliminate all unnecessary foreclosures and hire and train more staff to handle the added caseload that the plan will generate.
Most important, it will not put any delinquent loans into the foreclosure process during the 90 days it takes to implement its new plan.
JP Morgan Chase expects to help 400,000 families keep their homes during the next two years by working out $70 billion worth of loans. The company says its housing rescue efforts have already helped 250,000 families holding about $40 billion in loans.
"While Chase has helped many families already, we feel it is our responsibility to provide additional help to homeowners during these challenging times," said Charlie Scharf, CEO of Retail Financial Services at Chase. "We will work with families who want to save their homes but are struggling to make their payments."
The bank's announcement comes as Treasury Secretary Hank Paulson is under fire for engineering a $700 billion bailout for Wall Street without stipulating that the banks do anything to help troubled homeowners.
Chase's program will apply to all the loans owned directly by the bank. But Chase (JPM, Fortune 500) also acts as a mortgage servicer for loans owned by investors. Servicers are the companies that manage the everyday business of collecting payments and sending out bills. It is servicers that borrowers must contend with when they fall behind in payments, and the servicers who determine what help can or will be offered.
Of the $1.5 trillion in mortgages Chase controls, nearly 80% are owned by other investors, leaving 20% as bank holdings.
The bank will seek authority from investors to apply its foreclosure prevention plan to the loans that investors own, according to spokeswoman Christine Holevas. "We'll try to reach out to investors to do the same thing for their homeowners," she said, "but this is very complicated."
It's complicated because servicers are often reluctant to offer modifications to borrowers with loans that are owned by other entities. Servicers fear that investors could sue them for reducing the value of their securities if they modify loans without investor approval.
One of the program's most significant goals - and a notable enhancement of its current foreclosure prevention program - is to eliminate the negative amortization loans it services, most of which Chase inherited when it took over Washington Mutual Bank and EMC.
These loans, which are usually called option adjustable rate mortgages or pay-option ARMs, give borrowers the choice of making minimum monthly payments that do not even cover monthly interest. And most homeowners do opt to make only the minimum payments required, which means that their mortgage principal actually grows each month. That's what makes these loans particularly dangerous.
The modifications that the bank plans to offer option ARM borrowers include affordable 30-year, fixed-rate loans, as well as a conversion for 10 years to an interest-only loan and principal deferment, in which a large portion of the debt is forgiven for a term of years or until the house is sold.
Chase's initiative will offer the same kind of systematic workout options that Bank of America (BAC, Fortune 500) is giving to many of the troubled Countrywide Finance clients it acquired when it took over that lender. B of A is reducing moorage payments to 34% of a borrower's income. IndyMac Bank, which is now under the control of the Federal Deposit Insurance Corp., also recently implemented its own streamlined approach to loan modification, whereby borrowers will pay no more than 38% of their income on housing expenses.
Chase said it will review its entire portfolio to try to determine which of its customers are at risk and offer workouts to those borrowers before they get into trouble. It will streamline the process by using some kind of affordability standard (the bank declined to say how that will be done) to determine the best workouts it can offer customers to keep them in their homes.
Then it will contact the borrowers who will merely have to accept the offers to get more affordable mortgages.